A CPA's Look at the Trump Tax Plan

By Robert W. Hague, CPA

Are you wondering how President Donald Trump's proposed tax plan may affect you? Generally, the reform promises to significantly reduce taxes across all income levels, cap itemized deductions and increase standard deduction amounts.

Following, is a closer look at four major changes and how they may affect your 2017 taxes:

1. According to data from the Tax Policy Center, President Trump's plan would reduce the number of tax brackets from seven to three, leaving only 12, 25 and 33 percent. It would cut the average tax bill by $2,940 in 2017.

However, information from the Tax Policy Center shows highest-income households would benefit the most from President Trump's tax plan. These households account for 0.1 percent of the population, with incomes over $3.7 million. This group would receive an average tax cut of about $1.1 million. Conversely, the poorest fifth of households would see a tax reduction near $110, or 0.8 percent of their after-tax income.

2. The plan adds new deductions and more tax benefits for child and dependent care. However, the plan repeals personal exemptions and head of household filing status, which would cause many single parents and large families to face increased taxes. Itemized deductions will have a maximum of $200,000 for those married filing jointly and $100,000 for a single filing.

3. The corporate tax rate would be reduced from 35 to 15 percent. Owners of pass-through entities, such as partnerships and S corporations, could choose to be taxed at a flat 15 percent on pass-through income retained in the company and pay capital gain rates on qualified distributions to the owners. Corporations and pass-through companies could also expense investments in equipment, structures and inventories rather than depreciating those items over time. A business that decides to expense will not be able to deduct interest expenses. The maximum capital gain rate will remain at 20 percent.

4. The president's tax plan also includes repealing the Affordable Care Act tax, rescinding the alternative minimum tax and eliminating federal estate and gift taxes.

What would the overall effects be?

Estimates from the Urban-Brookings Tax Policy Center and Penn Wharton Budget Model state potential revenue losses would be offset by the repeal of personal exemptions and head of household filing, and the cap on itemized deductions.

However, the estimated national debt would rise by over 26 percent of gross domestic product (GDP) by 2026 if tax cuts were not offset by spending cuts. Both approximations show the plan would boost the GDP in the short term; but factoring in interest costs, the federal debt would increase by at least $7 trillion in the first ten years.

This is the president's proposed plan, but what is passed by Congress remains to be seen. We will keep you updated as the facts unfold.

Robert W. Hague, CPA is a partner at KDP Certified Public Accountants, LLP with 20+ years of experience in public accounting. He has a focus in tax, accounting and audit services for individuals, businesses, and not-for-profit entities, and also has significant experience with Employee Benefit Plans.